The Week That Was: Automotive Stocks

This week, we will review the new developments associated with Volkswagen AG (OTCMKTS:VLKAY), Daimler AG, and Tata Motors (NYSE:TTM). Daimler’s luxury vehicle division Mercedes-Benz has come out with a new coupe model, the GLE Coupe, reminiscent of the BMW X6. With growing demand for crossovers and luxury SUVs in the U.S., the new GLE Coupe might help Mercedes regain its luxury title, which has been taken over by BMW this year. Volkswagen, on the other hand, announced its investment in a new technology this week, aiming to revolutionize the budding electric vehicle market.

Biggest Winner: Volkswagen’s stock gained 0.6% in the last week, just outpacing the 0.4% growth for Daimler’s stock, while Tata Motors’ stock declined 4% — more than the fall in the overall S&P 500 Index in the week.

Below we discuss key events from last week in relation to the automotive companies in discussion.

Volkswagen

The German auto behemoth has bought a 5% stake in QuantumScape Corporation, a battery start-up, aiming to develop a new energy-storage technology that could more than triple the range of an electric car. Although the percentage contribution of electrically-powered vehicles to the net global vehicle sales is almost next to nothing at present, with growing emphasis on cleaner technologies and stricter emission standards, demand for electric vehicles is set to rise significantly going forward. QuantumScape is working on solid-state batteries as a substitute for the lithium-ion technology, which is used in many electric vehicles today. By doing so, the company believes the range of an electric car could be extended to nearly 430 miles, more than the present day industry-leading ranges of around 265-300 miles for the Tesla Model S.

We have a $44 price estimate for Volkswagen AG, which is roughly in line with the current market price.

See Our Complete Analysis For Volkswagen AG

Volkswagen is not new to the electric vehicle segment. The company launched its e-Golf, an all-electric car, in the U.S. at the tail-end of last month, and its line-up in Europe, comprising the e-Up!, e-Golf and the newly launched Audi A3 e-tron, holds 8% market share. Mindful of the growing electric vehicle demand, Volkswagen is looking to launch over twenty electric and plug-in hybrid electric vehicles in China, its single largest market, over the next few years, ranging from small-sized cars to large SUVs. The auto industry will keep a close eye on the development of the new solid-state batteries, which are also burn resistant. If mass produced in the coming years, the new technology might give an edge to Volkswagen in the electric vehicle segment, which is estimated to grow at a CAGR of almost 25% through 2023, outpacing the expected 2.6% annual growth for the overall light-duty vehicle market.

Daimler

Mercedes-Benz renamed its M-Class model lineup to GLE-Class this year, and recently introduced the GLE Coupe, combining the looks of an SUV and a luxury coupe. Crossovers have become popular in recent years as they provide both the functionality of a utility vehicle and the comfort and design of a car. The GLE Coupe will compete with the new model year BMW X6 (launched this month) in the U.S., aiming to add incremental sales for Mercedes, which has lost its luxury sales crown to BMW this year.  While BMW sold 298,212 units through November in the U.S., Mercedes’ sales totaled 296,382 units in the U.S.  during this period. Crossovers and luxury SUVs could be key vehicle segments going forward, seeing how combined sales in these two segments have grown 13.5% year-over-year in the first eleven months of the year in the U.S., compared to only a 5.4% growth in the country’s overall light-vehicle market. ^[1]

We have an $85 price estimate for Daimler AG, which is roughly in line with the current market price.

See Our Complete Analysis For Daimler AG

Tata Motors

Jaguar Land Rover, which forms over 95% of Tata Motors’ value by our estimates, plans to increase its sales to fleet customers through the new models Jaguar XE and Land Rover Discovery Sport- scheduled to come out early next year. The company cites the higher estimated residual values for the Jaguar XE — expected to hold onto 45% of its value over three years, ahead of comparable Audi and BMW models, and higher fuel efficiency of the Discovery Sport, as the key factors that could see the company’s fleet sales rise in the coming future.

Trefis’ price estimate for Tata Motors is $47, which is around 8% above the current market price.

See Our Complete Analysis For Tata Motors

According to Jaguar Land Rover, around half of the annual global light-vehicle sales by 2020 could be fleet sales, and that is a segment the British marquee wants a share in. However, a downside to higher fleet sales could be a loss in exclusivity for Jaguar Land Rover. The brand looks to address this by keeping an upper limit to the number of fleet sales for the Jaguar XE and Land Rover Discovery Sport. Nonetheless, with the new model launches, especially the mass market car Jaguar XE, Jaguar Land Rover is looking at significantly higher annual volume sales come next year.

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1. U.S. auto sales [↩]